It’s Baseball Season; a time for the Sox to come out and play.

Not the Red Sox — this is, after all, a legal blog (run by a Yankees fan, no less).  No, today, we’re talking about Sarbanes-Oxley (SOX) Whistleblower Protection.

Still with us. 

My colleague, Clarisse Thomas, has taken a look back at the U.S. Supreme Case of Lawson v. FMR LLC , which was decided last month.  Now that the dust and analysis have settled on the case, she gives us some practical and useful tips on what to take away from the case. 

A month ago, the Supreme Court significantly expanded — and dangerously I might add — the scope of Sarbanes-Oxley’s whistleblower protection provision. Now, not only does the provision protect employees of publicly traded companies, but it also protects employees of any private contractor or subcontractor who may work for those public companies. So, private employers, beware…

The case appears to be based more on public policy concerns than the actual text of the statute.

Let’s look first at the language of the law itself.  SOX’s whistleblower provision says:

§ 1514A. Civil action to protect against retaliation in fraud cases

(a) Whistleblower protection for employees of publicly traded companies. No [public] company . . . or any officer, employee, contractor, subcontractor, or agent of such company . . . may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee . . . .

Although the provision’s heading expressly indicates protection for employees of public companies, the Court held that the caption heading was just a “short-hand reference,” and therefore not intended to exclude employees who may work for private employers.

The problem in Lawson was that the public companies at issue were not public employers to which the statute’s protections would apply. They in fact were mutual funds, which, by their very nature, have no employees. Thus, given the statute’s limitations, the Court extended the statute’s reach to private contractors and subcontractors, and in doing so, dramatically increased the exposure of these private employers to potential liability.

The Court’s reasoning was simple: “It is common ground that Congress installed whistleblower protection in the Sarbanes-Oxley Act as one means to ward off another Enron debacle.” Herein lies the basis for the Court’s ruling. The term Enron was mentioned 34 times throughout the majority opinion.

Because the Court chose not to limit its holding in any way, the dissent opined that the decision would open the floodgates for whistleblowing lawsuits that are beyond the scope of SOX’s protections. The majority dismissed these concerns, by noting that such claims can be addressed later on.

Truth be told, a month after the case was decided, it remains unclear what the impact of this case will really be.  But because the case provides very little guidance as to the scope of claims that may be beyond SOX’s protections, and as to the types of private employers to which it applies, this decision will no doubt result in threatened and actual lawsuits in the years (if not months) to come.

What can private employers do to protect themselves? Much has been written (including a good summary in Employment Law 360) but the basic tips remain as follows:

  • As with a lot of these types of technical provisions, knowledge is key.
  • Familiarize yourself with SOX’s whistleblower protections and provide training to supervisory and managerial employees in furtherance of this goal.
  • Understand the full extent of the contractual relationship you may have with a public company, so that you can better assess whether Lawson may apply, given that relationship.
  • Consider preparing (or revising) policies that prohibit retaliation, to include the protected activities set forth in SOX’s whistleblower statute.
  • Finally, ensure that there are sufficient avenues in your workplace for employees to complain about possible SOX violations (being able to report an issue to just an immediate supervisor may not be enough), and ensure that sufficient procedures are in place to identify and prevent retaliatory conduct against employees who may report possible SOX violations.

The SOX are going to be playing ball for a long time to come.